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Milton Friedman 
Working Papers in Economics E-91-3 

The Hoover Institution 
Stanford University 
February 1991 

The views expressed in this paper are solely those of the author and do not necessarily reflect 
the views of the staff, officers, or Board of Overseers of the Hoover Institution. 

Hoover Institution 
Working Paper No. E-91-3 
February 1991 



Large stones quarried and shaped on a distant island were used as money on the Island of 
Yap. After Germany acquired the island at the turn of the century, its officials had difficulty 
inducing the residents to repair the footpaths until they resorted to the desperate expedient 
of taking possession of many of the stones by marking them with a cross in black paint, to be 
removed when the paths were repaired. The apparently meaningless measure had real results. 
That was equally true of an eerily similar event that occurred in 1932 when the New York 
Federal Reserve Bank transferred gold to the Bank of France by earmarking gold in its vaults. 

Milton Friedman 
Senior Research Fellow 
Hoover Institution 
(415) 723-0580 


Milton Friedman 
Senior Research Fellow 
Hoover Institution 

From 1899 to 1919 the Caroline Islands, in Micronesia, were a German 
colony. The most westerly of the group is the Island of Uap or Yap, which 
at the time had a population of five to six thousand. 

In 1903, an American anthropologist by the name of William Henry 
Furness III spent several months on the island and wrote a fascinating book 
about the habits and customs of its inhabitants. He was particularly im- 
pressed by the islanders' monetary system, and accordingly gave his book the 
title I have given this chapter: The Island of Stone Money (1910). 

11 [A] s their island yields no metal, they have had recourse to stone; 

stone, on which labour in fetching and fashioning has been expended, is 

as truly a representation of labour as the mined and minted coins of 


"Their medium of exchange they call fei , and it consists of large, 
solid, thick, stone wheels, ranging in diameter from a foot to twelve 
feet, having in the centre a hole varying in size with the diameter of 
the stone, wherein a pole may be inserted sufficiently large and strong 
to bear the weight and facilitate transportation. These stone 'coins' 
[were made from limestone found on an island some 400 miles distant. 
They] were originally quarried and shaped [on that island and the 
product] brought to Uap [ sic ] by some venturesome native navigators, in 
canoes and on rafts . . . 

Friedman 2 

"[A] noteworthy feature of this stone currency ... is that it is not 
necessary for its owner to reduce it to possession. After concluding a 
bargain which involves the price of a fei too large to be conveniently 
moved, its new owner is quite content to accept the bare acknowledgment 
of ownership and without so much as a mark to indicate the exchange, the 
coin remains undisturbed on the former owner's premises. 

"My faithful old friend, Fatumak, assured me that there was in the 
village near-by a family whose wealth was unquestioned, — acknowledged 
by every one — and yet no one, not even the family itself, had ever laid 
eye or hand on this wealth; it consisted of an enormous fei , whereof the 
size is known only by tradition; for the past two or three generations it 
had been, and at that very time it was lying at the bottom of the sea! 
Many years ago an ancestor of this family, on an expedition after fei , 
secured this remarkably large and exceedingly valuable stone, which was 
placed on a raft to be towed homeward. A violent storm arose, and the 
party, to save their lives, were obliged to cut the raft adrift, and the 
stone sank out of sight. When they reached home, they all testified that 
the fei was of magnificent proportions and of extraordinary quality, and 
that it was lost through no fault of the owner. Thereupon it was 
universally conceded in their simple faith that the mere accident of its 
loss overboard was too trifling to mention, and that a few hundred feet 
of water off shore ought not to affect its marketable value, since it was 
all chipped out in proper form. The purchasing power of that stone 
remains, therefore, as valid as if it were leaning visibly against the 
side of the owner's house.... 

"There are no wheeled vehicles on Uap and, consequently, no cart 
roads; but there have always been clearly defined paths communicating 

Friedman 3 

with the different settlements. When the German Government assumed the 
ownership of The Caroline Islands, after the purchase of them from Spain 
in 1898, many of these paths or highways were in bad condition, and the 
chiefs of the several districts were told that they must have them re- 
paired and put in good order. The roughly dressed blocks of coral were, 
however, quite good enough for the bare feet of the natives; and many 
were the repetitions of the command, which still remained unheeded. At 
last it was decided to impose a fine for disobedience on the chiefs of 
the districts. In what shape was the fine to be levied?... At last, by 
a happy thought, the fine was exacted by sending a man to every failu and 
pabai throughout the disobedient districts, where he simply marked a 
certain number of the most valuable fei with a cross in black paint to 
show that the stones were claimed by the government. This instantly 
worked like a charm; the people, thus dolefully impoverished, turned to 
and repaired the highways to such good effect from one end of the island 
to the other, that they are now like park drives. Then the government 
dispatched its agents and erased the crosses. Presto! the fine was paid, 
the happy failus resumed possession of their capital stock, and rolled in 
wealth" (pp. 93, 96-100). 

Unless you are very unusual, your immediate reaction, like my own, 
will be: "How silly. How can people be so illogical?" However, before 
criticizing too severely the innocent people on Yap, it is worth contemplat- 
ing an episode in the U.S. to which they might well have your reaction. In 
1932-33, the Bank of France feared that the U.S. would not stick to the gold 
standard at the traditional price of $20.67 an ounce of gold. Accordingly, 
it asked the Federal Reserve Bank of New York to convert dollar assets that 
it had in the U.S. into gold. To avoid the necessity of shipping the gold 

Friedman 4 

across the ocean, it requested the Federal Reserve Bank simply to store the 
gold on the Bank of France's account. In response, officials of the Federal 
Reserve Bank went to their gold vault, put in separate drawers the correct 
amount of gold ingots, and put a label or mark on those drawers indicating 
that they were the property of the French — for all it matters they could 
have done so by marking them "with a cross in black paint" just as the 
Germans did to the stones. 

The result was headlines in the financial newspapers about "the loss 
of gold," the threat to the American financial system, and the like. U.S. 
gold reserves were down, French gold reserves up. The markets regarded the 
U.S. dollar as weaker, the French franc as stronger. The so-called "drain" 
of gold by France from the United States was one of the factors that ulti- 
mately led to the banking panic of 1933. 

Is there really a difference between the Federal Reserve Bank's be- 
lieving that it was in a weaker monetary position because of some marks on 
drawers in its basement and the Yap Islanders' belief that they were poorer 
because of some marks on their stone money? Or between the Bank of France's 
belief that it was in a stronger monetary position because of some marks on 
drawers in a basement more than 3,000 miles away and the Yap Islander's 
conviction that he was rich because of a stone under the water some 100 or 
so miles away? Or, for that matter, how many of us have literal personal 
direct assurance of the existence of most of the items we regard as consti- 
tuting our wealth? Entries in a bank account, property certified by pieces 
of paper called shares of stocks, and so on and on. 

The Yap Islanders regarded stones quarried and shaped on a distant 
island and brought to their own as the concrete manifestation of wealth. 
For a century and more, the "civilized" world regarded as a concrete mani- 

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festation of its wealth metal dug from deep in the ground, refined at great 
labor, and transported great distances to be buried again in elaborate 
vaults deep in the ground. Is the one practice really more rational than 
the other? 

What both examples — and numerous additional ones that could be 
listed — illustrate is how important "myth," unquestioned belief, is in 
monetary matters. Our own money, the money we have grown up with, the 
system under which it is controlled, these appear "real" and "rational" to 
us. The money of other countries often seems to us like paper or worthless 
metal, even when the purchasing power of individual units is high.